Question
Article 63(b)(ii) of Regulation (EU) No 575/2013 (CRR) states that capital instruments and subordinated loans shall qualify as Tier 2 instruments provided that particular conditions are met. One of such condition requires that the instruments are not purchased or the subordinated loans are not granted, as applicable, by either the institution or its subsidiaries. Is it a correct approach that only the part of capital instruments which is not currently held by subsidiary should be qualified as Tier 2 instruments? Should an institution apply for permission for the whole issue and after that exclude instruments held by subsidiaries, if national law requires a special permission from the competent authority in order to recognize instrument as Tier 2 capital? And after being granted this permission should the institution exclude in day-to-day adequacy calculation the amount of instruments held by subsidiary?
Background on the question
A subsidiary holds in its trading book, with trading intent, some subordinated bonds (only a small part of the whole issue) issued by an institution that is its parent entity. The subsidiary can hold everyday a different number of subordinated bonds issued by the institution (its parent entity). The part of subordinated bond issue not held by subsidiary meets other conditions set by Article 63 CRR to be qualified as Tier 2 capital. Also, according to the national law of the country of incorporation of both institutions, a special permission needs to be granted by the competent authorities in order to recognise instruments as Tier 2 capital.
Answer
Article 63(b) of Regulation (EU) No 575/2013 (CRR) provides that capital instruments and subordinated loans shall qualify as Tier 2 instruments provided in particular that the instruments are not purchased or the subordinated loans are not grantedowned, as applicable, by any of the following: (i) the institution or , its subsidiaries, (ii) or an undertaking in which the institution has a participation in the form of ownership, direct or by way of control, of 20% or more of the voting rights or capital of that undertaking. Therefore, a capital instrument or a subordinated loan held by a subsidiary of an institution issuing such capital instrument or subordinated loan cannot qualify (in whole or in part, as applicable) as Tier 2 capital at the level of the institution at inception. Where the holding of such capital instrument by a subsidiary of an institution would happen subsequently in the context of market making operations performed by the subsidiary on capital instruments issued by the institution, the second subparagraph of Article 29(3)78(1) of the CRR Regulation(EU) No 241/2014 (RTS on own funds) applies. The predetermined amount for which the competent authority has given its permission under this Article 29(3) of the RTS on own funds to the subsidiary to perform market making on the capital instruments of the institution should be deducted from the own funds of the institution at consolidated and individual level from the moment the authorisation is granted pursuant to Article 28(3) of Delegated Regulation (EU) No 241/2014 and as also clarified in (see Q&A 2014_1352 and 2017_3277). The amount of the capital instruments which is not subject to the predetermined amount to be deducted continues to qualify as Tier 2 capital at the level of the institution and at consolidated level. For the sake of completeness, the above answer applies in an identical manner in the context of eligible liabilities in accordance with Article 72b(2)(b) CRR and Article 32b(3) of Delegated Regulation (EU) No 241/2014, as well.